A long-term strategic analysis | An alternative view point
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For many investors and those working in the fossil fuel industry, it seems that the writing's on the wall.
If you survey directors and investors in the oil and gas sector, you will most likely learn that most of them see the fossil fuel industry declining precipitously in the next decade, and some analysts argue that it would totally perish by 2045. The complete end of the oil and gas industry around 2045 does seem like the consensus view of the investors as well.
There can be no doubt whatsoever that carbon in the atmosphere causes heat retention, and excess carbon released by human activity is causing climate change, and we, as per the present circumstances, cannot afford to pump (or dump) high quantities of carbon in the atmosphere, as it would have dire consequences. Thus, it is widely believed, of course, that we cannot continue to rely on fossil fuels for our energy needs and, hence, it is evident that the oil industry, as we know it, will perish.
However, it is imperative that we analyze and study alternative scenarios to evaluate all plausible futures to assess where the demand for crude, etc., would actually lie. To that end, while worst-case scenarios are abundantly present in literature and projections, best-case scenarios for demand for oil are, well, scarcely presented.
This report presents a best-case scenario for the long-term demand for crude oil WTI, i.e., a scenario in which demand for oil increases or remains stable long-term. What factors may cause such a condition and the probability of such a scenario are also discussed. Alternatively, even if the industry perished, factors that can cause a rebirth of the industry, and related aspects are discussed in this technical report.
What can cause an increase in the demand for oil long-term?
Carbon emissions and their impact is classified as the most damaging and insidious pollutant produced as a by-product of fossil fuel usage. However, this very by-product may be a factor that prevents the long-term demand for fossil fuels and this industry from perishing.
While the climate can change and move more towards an increased global average temperature, there is another possibility; the climate moving more towards a decreased average temperature. Such a move, in the present period, can be classified as 'plausible.' We must consider the 'Milankovitch cycle' and related possibilities to understand this point further.
Earth's distance from the sun changes over thousands of years, and so does its tilt. Earth's axis, currently tilted at 23.5 degrees, changes every 41 thousand years. When the tilt is higher, more sunlight, especially in the north, hits the surface and causes more ice to melt; with less ice on the ground, more heat from the sun is also absorbed in the surface, furthering the warming effect.
Due to the tug of other planets in the solar system, the shape of Earth's orbit also changes over thousands of years. Earth's axis and precession change over time as well; about 13 thousand years ago, the tilt of the Earth was reversed to how it is now, and this had an amplifying effect on seasons, making them more extreme. Without getting into cyclical details, in summary, the Earth's tilt, obliquity, and the shape of the orbit, over time, changes, and this causes warm periods (similar to the current period) and ice ages.
We are presently in a warm interlude in an ice age; however, several models and analysts project that this may not persist long-term (Crew, 2015; Rosenberg, 2018).
It wouldn't take an ice age, of course, to bring back a push for demand for oil, but just 'concerns' that it may come in the next 50-100 years would be enough. If global temperatures start to decline and a trend does emerge, projecting that we are continually moving towards a shift in the warm interlude, to a cooling that may, in the eventuality of time, lead to the next paradigm shift in the climate, attitudes, due to practical reasons, would change towards fossil fuels in such a scenario.
Strategically, if we see a trend of declining temperatures, concerns regarding this condition, over time, would also arise. This would not occur in a period of 1-3 years, of course, and thus it is of no importance for day traders and short-term investors; nonetheless, this would impact governments and their strategic outlook, long-term investors, and creditors in the oil and gas sector.
Why would a cooling of temperatures impact the demand for oil?
Persistent cooling of temperatures and build-up of snow over time, as it occurred most recently in the 1400s to 1800s, cannot be afforded now by a planet of about 8 billion people.
Such a condition would render vast regions of arable land unusable for crops. It would also cause mass migration and further deforestation around the equator for the production of crops, devastating fragile ecosystems, yet still not yielding enough to sustain populations.
If such a condition is foreseen, the present viewpoint on carbon emission should take a 180-degree turn. If such temperature trends persist, current renewable energy generation structures, such as hydro and related mechanisms, wouldn't work due to water freezing in dams, etc.
Reduced amounts of sunlight reaching solar panels would also reduce their productivity substantially, rendering them useless in most cases. Wind turbines, similarly, also have a minimum operating temperature, approximately -30 degrees Celsius; in areas where the temperature drops below this level, the functionality of wind turbines would also be disrupted (GC, 2021). The only two sources that would be deemed reliable in such conditions would be thermal and nuclear energy.
We also know that widespread reservations exist about nuclear energy, and this means that thermal would be the only viable solution implementable on a large scale in such a situation, in many parts of the world. Such a condition needn't occur to revitalize the long-term prospects of the oil industry, but only a change of projections would make the industry of long-term strategic importance.
If persistent yearly lowering in temperatures leads models to confirm a paradigm shift in climate, opposite to current expectations, oil and carbon emissions would perhaps be the only 'instruments' that can be used to impose, an intended greenhouse effect on the planet – in a systemic and measured method. If we see a severe climactic event coming that would cause the above-mentioned insurmountable problems, the only solution would be to protect the state of the climate from such a natural paradigm shift for the survival of the vast majority of the human population.
This scenario, as per our analysis, is plausible; however, assigning a probability to this scenario is very difficult.
Furthermore, if such a scenario does not play out, and the oil and gas industry does perish, and carbon levels in the atmosphere are reduced to a pre-industrial revolution level, as per the Milankovitch cycle, there will be a cooling in the future, and when the start of such a climactic paradigm shift is seen to be about 3 to 6 decades away, the fossil fuel industry would be revived.
Why is this scenario important, if at all?
When conducting strategic future demand analysis, it is imperative to include a wide variety of plausible future scenarios in the model for projecting future demand. For example, in a beta distribution methodology, a worst-case, base-case, and best-case must be calculated; of course, within the probability assessment of each scenario are plausible scenarios that can be classified as favorable or unfavorable to formulate the overall probability of a particular case. The viewpoint presented in this report can be used in the assessment of the best-case scenario of demand.
Climate change due to carbon emissions is absolutely a grave concern. It can severely damage the planet if current climate trends persist. This report helps as a theoretical analysis for 'considerations to take into account in a strategic assessment.'
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Crew, B. (2015). Science Alert. Retrieved from https://www.sciencealert.com/a-mini-ice-age-is-coming-in-the-next-15-years
GC. (2021). Wind Energy in Cold Climates. Government of Canada. Retrieved from https://www.nrcan.gc.ca/energy/energy-sources-distribution/renewables/wind-energy/wind-energy-cold-climates/7321
Leighly, J. (1949). Climatology since the year 1800. Eos, Transactions American Geophysical Union, 30(5), 658-672.
Rosenberg, M. (2018). The Next Ice Age. Retrieved from https://www.thoughtco.com/the-next-ice-age-1434950 Wei, Y., Liu, J., Lai, X., & Hu, Y. (2017). Which determinant is the most informative in forecasting crude oil market volatility: Fundamental, speculation, or uncertainty?. Energy Economics, 68, 141-150.